Covid-19 caused unprecedented cuts in dividends in Q2 2020, down £22bn on a headline basis, and £16.4bn down on an underlying basis (i.e. if special dividends are excluded).

Dividends fell 57.2% to £16.1bn on a headline basis, or 50.2% to £16bn if special dividends are excluded.

The figures are from the latest Dividend Monitor from global financial administrators Link Group.

It found 176 companies cancelled their dividends altogether and another 30 cut them – together these made up three quarters of all the companies that usually pay in the second quarter. Just 61 increased their payouts.

Comparison to 2008 crisis

In the aftermath of the 2008 global financial crisis, which used to be the benchmark for ‘how bad things can get’, the worst quarter (Q1 2009) saw two fifths of companies cut their dividends, and only half of these (i.e. one fifth) cancelling them altogether.

The Q2 2020 total fell by 57.2% to £16.1bn, almost £22bn less than in Q2 2019 on a headline basis.

Excluding special dividends, which were exceptionally high this time last year, the decline was 50.2%, from £32.1bn to £16bn.

This was the lowest second-quarter total since 2010, and the decline itself is by far the biggest ever recorded. Discretionary special dividends have all but disappeared.

Of the £16.4bn of cuts in underlying (i.e. ex special dividends) in the second quarter, half of the impact came from the financial sector, after the Bank of England commanded the banks to cancel all shareholder payouts for 2020 and leant heavily on insurance companies to follow suit.

Some insurers resisted, notably Legal & General and Admiral, but most bowed to pressure from the regulator.

Shell cut its payout by two thirds, the first reduction it has made since the Second World War. Collectively, oil sector cuts totalled £2.2bn in the second quarter. Almost as much, £2bn, came from the industrials sector including aviation, construction, engineering, and support services.

Nine in ten companies cancelled their dividends altogether.

Discretionary spending

Some £1.7bn fell away from consumer discretionary sectors that include media, housebuilding, travel, leisure, and retail – the last four of these especially badly hit by the lockdown. Only four companies out of 55 did not cancel their Q2 payout, most of them media groups such as Pearson.

Among consumer basics companies that include food retail, food, drink and tobacco, and personal items, dividend cuts were less severe than elsewhere. These sectors are classic defensives, whose earnings are relatively sheltered during a crisis. More than half the companies in the sector actually increased their payouts year-on-year.

Best and worst case scenarios

Link Group’s best-case scenario for 2020 now sees payouts falling 39% to £60.5bn on an underlying basis, down from £98.5bn last year.

One-off special dividends were exceptionally high in 2019 and will be exceptionally low this year, so the decline in the headline figure will be 45% on a best case basis, dropping from £110.5bn to £61.6bn.

Link’s worst case sees a fall of 43% to £56.3bn on an underlying basis or 49% on a headline basis to £56.7bn.

Over the next twelve months Link Group now expects UK equities to yield 3.6% on a best case scenario (in line with the long run average of 3.5%) or 3.3% on a worst-case scenario.

Susan Ring, CEO Corporate Markets of Link Group, said: “The second quarter was truly a record breaker. Not by a whisker, nor by a nose, but by a mile. The whole of 2020 will, without doubt, see the biggest hit to dividends in generations.

“As the lockdown wore on and restrictions became ever tighter, the economic damage spread to more and more companies. At the same time, it became clearer which companies were more resilient, and we were able to assess more accurately how deep cuts would go for those companies not simply cancelling payouts altogether. The gap between our best- and worst-case scenarios is now just four percentage points, far narrower than our first estimate made in early April in the midst of the turmoil.”